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Leading the pack in blockchain banking Trailblazers set the pace

IBM Institute for Business Value

The Economist Intelligence Unit survey conducted by

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Leading the pack in blockchain banking – Trailblazers set the pace | 3

The IBM Institute for Business Value

with the support of the Economist

Intelligence Unit surveyed 200 banks

in 16 countries on their experience

and expectations with blockchains.

What differentiates the early adopters

and what can we learn from them?

First movers: Trailblazers set a fast pace and new direction

Just a handful of banks are operating on blockchains today. In 2017, 15 percent of the banks in our study

expect to have blockchains in commercial production. These Trailblazers are prioritizing blockchain efforts

to break through barriers to creating new business models and reaching new markets.

Opportunity seekers: Trailblazers prioritize key business areas for optimal benefits

Time, cost and risk benefits: Trailblazers are prioritizing blockchains in three areas – reference data, retail

payments and consumer lending.

New business models: Trailblazers expect blockchains to yield the greatest effect in opening up new

business models in three areas – trade finance, corporate lending and reference data.

Shifting profit pools: New vectors for growth and disruption

Defending disruption: Trailblazers see a significant wall of disruption heading their way. They expect

five out of nine core business areas to experience significant disruption and are investing in each one.

Investing for growth: Across the industry, all banks are investing in international payments, other cash

management, corporate lending, consumer lending, mortgages and deposit taking.


Figure 1. First to finish: Respondents' expectation of when they will have blockchains in commercial production and at scale

First movers Trailblazers set a fast pace and new direction

4

When the first international payments on a blockchain crossed the wires, the transaction was completed in

a matter of seconds instead of hours.1 Speed of execution, of course, is one benefit derived from blockchains,

but speed is also proving the operative word when it comes to blockchain commercialization. Our survey of

commercial and retail banks reveals that the industry is hurtling toward blockchain adoption far faster than

many expected.

Commercial applications in banking are few in number today. In 2017, a full 15 percent of the banks in

our study expect to have commercial blockchain solutions at scale (see Figure 1). We call this group the

Trailblazers. In effect, 2017 looks to be the year banking on blockchains shifts from zero to sixty. First-

mover advantages for this group include the ability to influence and set the business standards by which

others will operate. Moreover, as start-ups take aim at incumbents and new business models expand beyond

industry boundaries, first-mover banks will be well situated to get ahead of the consequent disruption.

These Trailblazers aren’t the small start-ups or fintechs many might expect to enter first. Instead, Trailblazers

are made up of a disproportionate number of medium sized banks and are more than twice as likely to be large

institutions that number more than a hundred thousand employees. Defying expectations, these larger banks

are proving they have the agility to move fast in the face of change.

Mass adopters

51%

2020 2017

Followers

34%

Trailblazers

15%

2018

Leading the pack in blockchain banking – Trailblazers set the pace | 5 First movers (continued)

Figure 2. Frictions framework: Information, innovation and interaction frictions can be minimized by blockchains

In our first blockchain study, “Fast forward”, ibm.biz/fastforward, we examined the potential for blockchains to

eradicate the frictions that hold companies back, limit their growth and constrain innovation. We identified nine

frictions that challenge enterprises today (see Figure 2) and analyzed the impact blockchains might have. This

study asked for the views of bankers on these same frictions.

Frictions

Transaction costs

Degrees of separation

Inaccessible marketplaces 1 | Interaction

3 | Information Imperfect information

Inaccessible information

Information risks

2 | Innovation Restrictive regulations

Institutional inertia

Invisible threats

http://www-935.ibm.com/services/us/gbs/thoughtleadership/blockchain/




We found that all banks expect blockchains to eradicate frictions across the board. But Trailblazers stand

apart from other banks in one respect. They see the most substantial reductions in those frictions that bring

down the barriers to creating new business models and entering new markets. Likewise, these bold banks

are singularly focused on using blockchain technology to greatly improve the accuracy of the information

they rely on to act on decisions (see Figure 3). How individual banks respond to blockchain opportunities in the next few years will depend on their

circumstances, capacity and ambition. How regulators respond – and where – will influence the evolution

of blockchains. As with any new technology with the potential to transform, there can be no cookie-cutter

approach. However, the plans, priorities and investments of the Trailblazers who are poised to enter the market

today do illuminate a direction.

Trailblazers Other banks

Imperfect information

Decision making impeded by inaccurate, misleading or or incomplete information

Invisible threats

Risk of new business model disruptions or new competition that are difficult to predict

Inaccessible marketplaces

Assets that are underutilized or cannot be monetized and do not contribute to revenue growth

26% 59% 22% more more more

77% | 61% 73% | 46% 73% | 60%

First movers (continued)

Figure 3. Path to growth: Trailblazers identify the three frictions that blockchains can most reduce



83% 59%

80% 60%

79% 64%

77% 70%

77% 63%

74% 60%

73% 67%

71% 58%

69% 67%

Opportunity seekers By now, most banks have concluded that blockchains could greatly reduce the time, cost and risk of many

transactions. As banks gain experience from pilots, this calculation grows sharper. We asked banks to weigh

time, cost and risk benefits in nine core business areas and analyzed their answers to calculate a blended

score for each business area. Our analysis reveals near unanimity; blockchain benefits are compelling and can

be gained in every aspect of banking. Trailblazers identified three business areas with the highest benefits –

reference data, retail payments and consumer lending (see Figure 4).

Trailblazers prioritize key business areas for optimal benefits

7

Retail payments

Corporate lending

Mortgages Deposit taking

International payments

Reference data

Consumer lending

Other cash management

Trade finance

Figure 4. Benefits for all: Blockchains’ impact on time, cost and risk


43% more

Payments and lending on blockchains are a

target-rich environment for efficiency. Transactions

on blockchains not only eliminate the time and

labor required for reconciliations, they minimize

errors and significantly reduce the time needed for

settlement, which in turn lowers risk and capital

requirements. Trailblazers are 43% more likely than

other banks to expect significantly less risk as retail

payments move to blockchains (see Figure 6). Cost savings are particularly attractive in consumer

lending: nine out of ten Trailblazers expect significant

results in cost savings alone (see Figure 7). For

consumer lenders, access to new markets is another

attractive proposition. Lack of credit history and

identity fraud has made it difficult to grant loans to

Opportunity seekers (continued)

Figure 5. Key Trailblazer reference data benefits Figure 6. Key Trailblazer retail payments benefits Figure 7. Key Trailblazer consumer lending benefits

Risk savings 83% | 61%

Cost savings 87% | 59%

Time savings 80% | 58%

As might be expected, reference data claimed the

top spot (see Figure 5). On blockchains, reference

data is automatically captured in real time, validated

and shared as permitted across business divisions

and institutions. It becomes in effect, an always

up-to-date self-integrating system of truth.

As data siloes are connected to blockchains,

benefits build up: Costly and time-consuming

reconciliations are all but eliminated and an

instantaneously verifiable audit trail discourages

bad actors and potential for fraud. Data integrity is

assured and banks gain a superior platform for up-

to-the-minute analytics. Because reference data is

integral to all of a bank’s activities and isn’t bound by

the complex regulations found in other areas of

banking, it’s proving a good place to start.

unbanked customers. On blockchains, as new kinds

of verificable transaction data is captured, enhanced

identity and know your customer (KYC) data could

open up emerging markets to banks.

When the time, cost and risk benefits from

blockchains are considered independently of

each other, additional business areas stood out.

Corporate lending ranked 2nd in time savings; international payments took 3rd place in cost savings; and trade finance was the 3rd highest in reducing risk.







Trailblazers | Other banks

Leading the pack in blockchain banking – Trailblazers set the pace | 9 9 Opportunity seekers (continued)

A platform for change Blockchain enthusiasts, of course, promised something more than an ERP upgrade; they promised a

revolution. We asked bankers to share their expectations and experiences on the potential for blockchains

as a platform for new business models. Trailblazers identified three areas where blockchain-based business

models reach the most impact: Trade finance, corporate lending and reference data (see Figure 8).

Trade finance modernized Trade finance is one area where both Trailblazers and other banks agree that an entirely new business model

should emerge. Mired in complexity due to the number of parties, handoffs, paper documents and manual

processes involved in even a single shipment, trade finance appears long due for an overhaul. Blockchains

make it possible to reinvigorate this large global market. Bank-intermediated short-term trade finance alone

has been estimated to be USD 6-8 trillion worldwide.2


Trade finance Corporate lending Reference data

22% 17% 31% more more more

83% | 68% 80% | 63% 77% | 59%

Figure 8. Trailblazers’ top three blockchain-enabled business models

Leading the pack in blockchain banking – Trailblazers set the pace | 10 10 Opportunity seekers (continued)

Major institutions like Bank of America Merrill Lynch are innovating to reduce risk, streamline processes and

improve financing.3 Established banks as well as fintechs have pilots well underway in areas that include bills

of lading and letters of credit, documents that haven’t typically been shared or stored in digital form. These

modernization efforts are creating immediate efficiencies, but the bigger benefit may be to the heightened

visibility that banks will have. With greater access to historical data and real-time trade transactions, banks

stand a good chance to greatly improve the profitability of financing as well as the acquisition of new clients.

Banks won’t be without new competition: Alibaba, China’s largest e-commerce enterprise has set its

sights on providing its own financial services including trade finance, and is exploring blockchain-enabled

financial services.4

Corporate lending unbound Lengthy settlement periods – often 20 days or more – are a drag on corporate lending, tying up capital and

exposing banks to new and nimbler competitors. Smart contracts on blockchains promise to dramatically

reduce the time to settlement. As blockchains evolve to cross industries and more immediately verifiable data –

including real-time access to assets and other forms of collateral – is captured and shared with banks, the pool

of borrowers could expand to include the many small and medium sized enterprises that are locked out of

credit today.

A more radical model, direct peer-to peer lending on a blockchain, is already being tested by microenterprises

and could prove applicable to larger institutions that want to expand their customer bases. The peer-to-peer

model, of course, could also threaten those incumbent banks that move too slowly.5

of small and medium enterprises don’t have access to the financing they need – a credit gap estimated at

USD 2 trillion6

Leading the pack in blockchain banking – Trailblazers set the pace | 11 11

Reference data monetized Real-time data synchronization creates entirely new opportunities to monetize data and create new financial

services. Credit Mutuel Arkea has already pulled data from multiple systems to integrate its identity and KYC

data on a blockchain. It has identified operational benefits that it believes will boost the bottom line and also

heighten customer satisfaction. Credit Mutuel Arkea expects that it will some day provide new proof of identity

services to third parties, including utilities, retailers and other regulated service providers.7 As blockchains

become more common in other industries, the reference data that banks possess could drive the next

generation of financial services.

New business models will take many forms and evolve as organizations work with regulators to establish new

processes and platforms. One thing is certain: Disruptors have found a new platform; they’re moving faster

than most anticipated, and they’re poised to break new ground.

Opportunity seekers (continued)

“Blockchain is a transformative agent in our operational application, as proven by this project – the first of its kind in France. This pilot offers a complete view of customers’ documents across our distributed network.” Frédéric Laurent, COO Innovation & Operations,

Crédit Mutuel Arkéa


Inve

stmen

t by

2018

Potential for disruption

High

Low High

Consumer lending

Corporate lending

Deposit taking Mortgages

Trade finance

Retail payments


Reference data


Return to growth

“Safe” bets On hold

Imminent revolution

Shifting profit pools For some time, flat returns on equity have pressured banks to seek new sources of growth. First digital

startups, then fintechs and non-financial institutions squeezed into the market, raised the bar on customers’

expectations for ease, immediacy and cost – and began eroding share. Now, a leading group of banks, the

Trailblazers, have their sights set on regaining ground.

When the Trailblazers, those banks with the most hands-on experience in blockchain technology, scan

the horizon, they see something different than other banks – a wall of disruption heading toward them.

Trailblazers anticipate substantial disruption in five of the nine areas core to their business, including lending

and payments, the bread and butter of traditional banking (see Figure 9). By contrast, all other banks we

surveyed are counting on disruption in just two areas.

New vectors for growth and disruption

Figure 9. The great disruption: Areas of investment and disruption identified by Trailblazers

12


Defending disruption Because blockchains encourage trust, organizations can expand the number of enterprises with which they

transact. Smaller players and digital start-ups will have access to blockchain infrastructure that can make them

more competitive and trustworthy. These new competitors include institutions other than banks and are a

possible threat in two of the areas Trailblazers identified as most likely to be disrupted: deposit taking and retail

payments.

Corporate and consumer lending may be particularly vulnerable to new blockchain models. Because

blockchains are decentralized in form and governance they make possible direct transactions between

parties, disintermediating some and increasing the viability of peer-to-peer networks.

As blockchains span industries, new cross-industry ecosystems are sure to emerge. Banks will need to

determine which networks create the optimal opportunity to thrive – and acquire new customers, as well as

new types of data. In China, Xinyuan Real Estate, a real estate developer and property manager, unveiled in

July 2016 a new real estate finance blockchain platform that is supported by the Industrial and Commercial

Bank of China. The platform will include a network of institutions to, among other things, register, assess

and finance property. Developments like these portend a new approach to acquiring customers and

financing mortgages.8

Shifting profit pools (continued)


Figure 10. Set to spend: Areas of investment and disruption identified by all banks

Potential for disruption

High

Corporate lending

Deposit taking Mortgages

Trade finance

Retail payments


Reference data


Inve

stmen

t by

2018

Return to growth

“Safe” bets on hold

Imminent revolution

Consumer lending

High Low

All banks concur that deposit taking is primed for disruption. Most don’t view the time, cost and risk benefits

posed by blockchains to be as high in deposit taking as they might be in other areas, but they agree on the

need to play defense and invest. The danger of disintermediation is being driven by fintechs and digital start-

ups that can entice customers by delivering a superior digital experience. Blockchain-enabled deposit taking

could prove to be pure defense – protecting the customer base – but like many activities in business, once a

chain of data and transactions is established on a blockchain and connected to other blockchains, it could

yield innovations as yet unimagined.

14

Investing for growth Even those banks that anticipate little disruption are investing in areas where time and cost efficiencies,

as well as reduced risk, could spur growth (see Figure 10).

Shifting profit pools (continued)


Recommendations To best extract value from blockchains, we recommend banks answer three questions:

How fast should we move? Fifteen percent of those surveyed have already started. These Trailblazers are setting a fast pace and charting a

direction for early advantage. Mass adopters can look to Trailblazers for lessons learned but they should be

prepared to join them in real-world applications as soon as possible.

For many, regulatory complexity and constraints seem an impenetrable barrier to blockchain adoption (see Figure 11). Regulators and legislators the world over are already participating in consortia to determine how

regulations might change – and regulators might benefit from blockchains. Leading banking institutions are

collaborating with regulators on blockchain projects to earn approval for implementation. Collaborations like

these are to be encouraged, and regulators have on the whole been supportive in their responses. Banks have

an opportunity to influence both the future regulatory environment and how fast new blockchain initiatives are

approved to enter the market.

How can we scale across business networks? Once blockchains have scaled across multiple parties, they can begin to achieve the kind of network effects

that drastically reduce frictions that curb growth. Trailblazers are already working on the new business and

technology standards that are required to scale. Mass adopters should join them and begin building strong

partnerships, including consortia and other groups that have begun establishing business standards.

More than half of organizations still view immature technology as a barrier (see Figure 11), and 7 in 10 cite the

need for robust mechanisms to establish identity and a high degree of control over access. Security and privacy

standards will bring more participants into blockchain networks and drive scale.

15

Figure 11. Barriers to implementing blockchains today

Among top 3 barriers

Regulatory constraints

Immature technology

Lack of clear ROI

Insufficient skills

Lack of executive buy-in

Insufficient business case

56%

54%

52%

46%

43%

51%

45%

47%

48%

55%

58%

49%


45%

47%

48%

55%

58%

49%

How can we innovate with new revenue models? As might be expected, our data shows that almost half of banks have already identified areas where a return

on investment is probable (see Figure 11). Banks that haven’t achieved this clarity of outcome should make

it a priority.

Consortia lay the groundwork for a better understanding of blockchains’ benefits, but many banks already

recognize that more focused collaborations with a few key partners is also necessary to innovate business

models. New revenue models must anticipate the potential for disruption in areas core to business today and

in the future. Whether defending each area or just a few, the surest offense is to focus early and fast on the

opportunity to implement new revenue models.

However the market evolves, blockchains will add at least one new revenue stream; the potential to monetize

reference data looms large. Banks should factor that into their thinking from the outset.

Recommendations (continued)

The Linux Foundation’s open-source

technology initiative, Hyperledger, has a

core focus on identity and permissions.

Institutions are working together on

Hyperledger to set the technology

standards that advance interoperability

across blockchains and help ensure that

blockchain platforms can evolve as

conditions change.


Notes and sources 1. Sofia. "ATB Financial, SAP and Ripple send the first real-time international blockchain payment from Canada to Germany." Let's Talk Payments. July 22 2016. https://letstalkpayments.com/the-latest-blockchain-trials-and-projects-the-race-for-adoption-in-on/

2. World Trade Organization. “Trade Finance and SMEs.” 2016. https://www.wto.org/english/res_e/booksp_e/tradefinsme_e.pdf

3. Rizzo, Pete. “Bank of America Latest to Conduct Blockchain Trade Finance Trial.” CoinDesk. March 1 2016. http://www.coindesk.com/bank-of-america-latest-to-develop-blockchain-trade-finance-trial/

4. Michael, Melodie. “Alibaba partners with e-lenders for trade finance.” Global Trade Review. March 13 2015. http://www.gtreview.com/news/global/alibaba-partners-with-e-lenders-for-uk-trade-finance-service/

5. Quentson, Andrew. “China’s internet giant to roll out blockchain for payments,” CoinJournal. July 11 2016. http://coinjournal.net/ant-financial-blockchain-tech/

6. Stein, Peer. “5 steps to closing the $2T credit gap.” World Economic Forum. October 26 2015. https://www.weforum.org/agenda/2015/10/5-steps-to-closing-the-2-trillion-credit-gap/

7. IBM press release. “IBM and Crédit Mutuel Arkéa Pioneer the Use of Blockchain to Manage Customer Identity and Improve Customer Satisfaction.” June 30 2016. http://www-03.ibm.com/press/us/en/pressrelease/50087.wss

8. EconoTimes. “Xinyuan’s new real estate blockchain platform to launch in August.” July 19 2016. http://www.econotimes.com/Xinyuans-new-real-estate-blockchain-platform-to-launch-in-August-237680

https://letstalkpayments.com/the-latest-blockchain-trials-and-projects-the-race-for-adoption-in-on/

https://letstalkpayments.com/the-latest-blockchain-trials-and-projects-the-race-for-adoption-in-on/

https://www.wto.org/english/res_e/booksp_e/tradefinsme_e.pdf

http://www.coindesk.com/bank-of-america-latest-to-develop-blockchain-trade-finance-trial/

http://www.gtreview.com/news/global/alibaba-partners-with-e-lenders-for-uk-trade-finance-service/

http://coinjournal.net/ant-financial-blockchain-tech/

https://www.weforum.org/agenda/2015/10/5-steps-to-closing-the-2-trillion-credit-gap/

http://www-03.ibm.com/press/us/en/pressrelease/50087.wss

http://www.econotimes.com/Xinyuans-new-real-estate-blockchain-platform-to-launch-in-August-237680


The study team would like to thank the following people for their contributions to this executive report: Steve Ballou Kristin Biron, Jim Brill, Phil Enness, Angela Finley, April Harris, Christine Kinser, Anthony Lipp, Kathleen Martin, Joni McDonald, Smitha Soman, Stephen Ott, Donald Thibeau, Idrissa Thioune and Anne-Marie Weber.

To learn more about this IBM Institute for Business Value study, please contact us at [email protected]. Follow @IBMIBV on Twitter and for a full catalog of our research, visit: ibm.com/iibv

Access IBM Institute for Business Value executive reports on your phone or tablet by downloading the free “IBM IBV” apps for iPad or Android from your app store.

Keith Bear, Vice President, Global Financial Markets

Nick Drury, Global Banking & Financial Markets Leader, IBM Institute for Business Value

Peter Korsten, Vice President, Global Thought Leadership and Eminence, GBS

Veena Pureswaran, Research Leader, Blockchain, IBM Institute for Business Value

Likhit Wagle, Global Industry General Manager Banking & Financial Markets; Industry Academy Member

James Wallis, Vice President, Global Payments Industry and Blockchain

Cuomo, Jerry, Shanker Ramamurthy, James Wallis et al. “Fast forward: Rethinking enterprises, ecosystems and economies with blockchains.” IBM Institute for Business Value. June 2016. ibm.biz/blockchainstudy

Pureswaran, Veena and Dr. Robin Lougee. “The Economy of Things: Extracting new value from the Internet of Things.” IBM Institute for Business Value. June 2015. ibm.biz/economyofthings

Pureswaran, Veena, Sanjay Panikkar and Sumabala Nair. “Empowering the edge: Practical insights on a decentralized Internet of Things.” IBM Institute for Business Value. March 2015. ibm.biz/empoweringedge

Brody, Paul and Veena Pureswaran. “Device democracy: Saving the future of the Internet of Things.” IBM Institute for Business Value. September 2014. ibm.biz/devicedemocracy

Related publications

Study team

Contributors

mailto:[email protected]

http://www.ibm.com/iibv

http://www.ibm.com/iibv

http://www.ibm.biz/blockchainstudy

http://www.ibm.biz/blockchainstudy

http://www.ibm.biz/economyofthings

http://www.ibm.biz/economyofthings

http://www.ibm.biz/empoweringedge

http://www.ibm.biz/empoweringedge

http://www.ibm.biz/devicedemocracy

http://www.ibm.biz/devicedemocracy

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